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Fed Tapering and India
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Quantitative EasingFed Tapering
QE, FT[GS2] Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
Impact on IndiaDollar Supply FDI-FII Exchange
RateImport Export
Sub Prime Crisis
Quant. Easing
Fed Tapering
Sub- Prime Crisis• Prime Borrower• Sub Prime Borrower
PRIME BORROWERS
Securitization=>
SUBPRIME BORROWERS
SUBPRIME BORROWERS
SUBPRIME BORROWERS
SUBPRIME BORROWERS
TOXIC Assets TOXIC Assets
Impact on India
Impact on IndiaDollar Supply FDI-FII Exchange
RateImport Export
Sub Prime Crisis Low Out Rupee
strong (39) down
Quant. Easing
Fed Tapering
Repo. Rate / Fed. Funding Rate
Toxic Assets Sub-Prime Borrowers
Quantitative Easing (Toxic Assets + T-Bond)
(Electronic)Dollar supply
increased
OPEN MARKET OPERATION (OMO) QUANTITATIVE EASING (QE)
Central bank sells OR buys government securities (treasury bonds) from the market.
Central "buys" securities, including those TOXIC assets.
If they buy=> money supply increasedSince they're only BUYING=> money supply increased.
If they sell=> money supply decreased.QE only INCREASES money supply. QE itself cannot decrease money supply.
MONETIZING THE DEBT QUANT.EASING (QE)
Central bank purchases "securities" from government and creates more money.
Central bank purchases (toxic) "securities" from market and creates more money.
Increases the money supply in the system.
same
Toxic Asset 40 BnT-Bonds 45 Bn
Impact on IndiaDollar Supply FDI-FII Exchange
RateImport Export
Sub Prime Crisis Low Out Rupee
strong (39) Down
Quant. Easing HIGH
IncreaseHOT money
Strong09=5010=44
DownsubprimeGreece/EU
Fed Tapering
December 2012When to stop QE?
Inflation >2.5%Unemployment <6.5%
Dollar supply high:1. Hot money2. Gold expensive (850-1900)
Fed Tapering• mechanical term= Continuous reduction of width.
Impact on IndiaDollar Supply FDI-FII Exchange
Rate Export
Sub Prime Crisis Low Out Rupee
strong (39) Down
Quant. Easing HIGH
IncreaseHOT money
Strong09=5010=44
DownsubprimeGreece/EU
Fed Tapering Med. Decline
Rupee weak (60)(Good for Export)
May increase
FT Impact on India: worst case scenario1. FII run away =>Sharemarket crash (flight
of capital)2. Dollar supply decrease=> rupee weakens.3. Good for export, bad for import & ECB. 4. No boost in export from USA, EU5. BoP crisis (high CAD, low capital)
Why BoP crisis in 1991-92?1991 (Apr-Sep) Million $$
Current -6000Capital +4000
Overall Balance -2000
IMF loan +2300 GOLD pledge65 tonnes
BRICS Bank-Decision to setup $100 bn-Help member nation in crisis-Limitation: will operate from 2015
China 41
Russia 18
India 18
Brazil 18
South Africa 5
total Bn 100
Steps taken to protect against FT
NRI FCNR: interest rate hiked + swap. (+35 bn$) = Capital inflow increase
Steps taken to protect against FT (2013)
Steps taken to protect against FT (2013)Dollar swap for Oil Marketing Co. •buy $$ from RBI instead of Market•repay dollars at later date (Feb-April 2014]•= Volatility decline•“managed” float exchange regime
Currency Swap agreement with Japan (50 Bn)•RBI vs Bank of Japan•Will give each other dollars incase of speculator attack
Steps taken to protect against FT (2014)
$$ From Japan
From government’s side• FDI liberalization• Fast tracking of environment clearances• Project monitoring group
=FDI capital inflow increase.
Steps taken to protect against FT (2014)• Inflation => Real interest rate
negative => gold / real-estate.• If RBI starts Inflation targeting
=>more investment in banks and securities by locals.• FDI, FII, ECB= less dependence.
Ref. lecture 3
Mock Question• “The fears about the negative impact of Fed tapering on Indian
economy, are unfounded.” Do you agree? Justify your stand (10m | 200 words)
Mock Question“The fears about the negative impact of Fed tapering on Indian economy, are unfounded.” Do you agree? Justify your stand (10m | 200 words)
1.Term: Fed Tapering2.Impact, what?3.Fear unfounded, why?
Mock Question“The fears about negative impact of Fed tapering on Indian economy, are unfounded.” Do you agree? Justify your stand (10m | 200 words)•Fed tapering= gradual reduction in bond purchase program of US feds.Why fear (consequences /negative impact)?
•flight of capital => sharemarket collapse•Rupee weakens => CAD widens•flight of capital + CAD + Speculator attack => BoP crisis
Mock Question•Why fears unfounded?1.Fed tapering = US economy back on track = boost in import
by US firms =good news for Indian IT firms.2.BRICS bank.3.RBI’s side: FCNR reform, dollar swap for OMC, currency
swap with Japan4.Government’s side: FDI reform, fast tracking projectsAs a result (1) forex reserves are good enough to withstand
pressure (2) economy resilient and attractive for capital inflows.